A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products; otherwise, the full price is due within 30 days. Forty percent of customers take advantage of the discount. The firm plans to drop the discount so the new terms will simply be net 30. In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30. The firm currently sells 1000 units per month at a cost per unit of $45 and a selling price per unit of $80. If the firm's required return is 2%, what is the net present value (NPV)of making this change? (Assume that all 1,000 units are sold at the beginning of the month and the cost of producing the units is paid immediately.)

Question

Quizplus · Accepted Answer

The NPV of making the change is calculated by considering the loss of sales revenue from selling 100 fewer units and the impact of receiving payments later. The loss in revenue from 100 fewer units is 100 units * ($80 - $45) = $3,500 per month. The cash flow impact of receiving payments later is calculated by considering the time value of money, which results in a negative NPV of -$169,860.

A Firm Currently Sells Its Product with a 2% Discount